WB downgrades Philippines growth outlook

MANILA, Philippines - The World Bank has revised downward its economic growth projections for the Philippines this year and the next, warning that growth would largely depend on public spending, disaster reconstruction, and further structural reforms.

In a report, the World Bank said baseline growth projections were revised downward from the original 6.6 percent to 6.4 percent for 2014, and from the earlier 6.9 percent to 6.7 percent for 2015.

According to the World Bank, private consumption driven by strong remittance inflows would drive the economy “but growth will depend heavily on the ability of the government to ramp up spending.”

“An acceleration of reconstruction spending can support growth at above six percent,” the World Bank said.

A number of external and domestic factors could likewise pose risks to growth, it added.

External risks could come from disorderly policy normalization in high-income countries, a disorderly adjustment in China’s property market, political tensions in the Middle East and Eastern Europe, and territorial disputes with China.

On the domestic side, the main sources of risk are low government consumption, slow reconstruction spending, and domestic reform lags, in particular reforms to raise tax revenues needed to raise infrastructure and social services spending.

Inflation is projected to reach the ceiling of the Bangko Sentral ng Pilipinas’ three-to five-percent target.

It will also force monetary tightening and greater use of macro-prudential measures, such as further increases in the RRR and policy rates.

The World Bank report, entitled East Asia Pacific Economic Update, warned that food supply could remain tight throughout 2014 because of poor harvests due to weather-related disturbances, and could be exacerbated by droughts due to El Niño.

In addition, because rice is a basic consumption necessity with inelastic demand, any delay in the importation of rice, which is controlled by the government, could result in sharp increases in rice prices. Moreover, short-term depreciation of the peso and higher fuel prices are sources of inflation.

The World Bank said growth can be sustained and made more inclusive by pursuing structural reforms and investing more in human and physical capital in the medium term. Key structural reforms include protecting property rights, promoting more competition, and simplifying regulations.

The report noted the government’s planned doubling of infrastructure spending to five percent of gross domestic product (GDP), and significant increases in health and education spending, which require new sources of revenues.

“This can be achieved through a package of tax policy and administrative reforms,” the World Bank said.

There is scope to increase tax revenues, by, for example, broadening the base and making the tax system simpler, more efficient, and more equitable, while simultaneously lowering certain tax rates to increase the political feasibility of such a package.

The government has successfully raised taxes by 1.2 percentage points of GDP in the last three years through the sin tax reform, improved tax administration, and higher growth.

Accelerating the current reform momentum would help the country yield additional tax revenues to create the fiscal space needed to enhance growth in the coming years.

Meanwhile, economic growth of developing East Asia is seen to slow down to 6.9 percent this year, from 7.2 percent in 2013 due to various external risks.

World Bank East Asia and Pacific regional vice-president Axel Vann Trotsenburg said the region has the potential to continue to grow at a higher rate and faster than other developing regions if policy makers implement an ambitious domestic reform agenda.

The region remains vulnerable to a sharp slowdown in China, which though unlikely to happen, could hurt commodity producers which include metal exporters in Mongolia and coal exporters in Indonesia.